Download Market Coupling: Key to EU Power Market

APX Energy Viewpoints
Autumn 2007
Market Coupling: Key to EU
Power Market Integration
Market coupling is a way of using existing cross capacity efficiently and of
creating regional energy markets. Our Expert Panel believe that coupling
is a necessary but not sufficient condition for reducing congestion. It works
best where there is a day-ahead power exchange but it is no substitute for
more fundamental reforms such as TSO network unbundling.
Setting the Scene
Market coupling is now a key element in
the European Commission’s approach to
creating an integrated energy market. The
current process focuses on establishing
regional energy markets – 7 electricity
regions and 3 gas regions – by bringing
together what are essentially fragmented
national markets. This is currently the
focus of considerable activity at EU level,
while the next challenge – creating a
European market from these regional
clusters – awaits.
In its 3rd energy package, the Commission
has highlighted the need for greater
co-ordination and co-operation amongst
transmission system operators, particularly
in the areas of the development of market
and technical codes, the co-ordination of
grid operation and investment planning.
The EC’s eventual aim appears to be
regional, rather than national, transmission
system operators fully independent of
supply or generation interests.
The proposed Agency for the Co-operation
of Energy Regulators to improve energy
regulation across Europe is also aimed at
developing common standards and
approaches that would make regional
energy markets and ultimately a European
energy market a reality.
Process of market coupling
Market coupling is a congestion
management method where allocation
of cross-border transmission capacity is
determined according to demand on
the respective energy markets. It is an
implicit auction approach typically used
at the day-ahead stage whereby for
every hour of operation either prices
across the energy markets converge or
all the available transmission capacity is
utilised, with power flowing towards the
high price area.
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In contrast, in explicit auctions the
transmission capacity is auctioned to the
market separately and independently
from the trading of electricity. Explicit
auctions are a relatively simple method
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of handling cross-border capacity, and are
widely used across Europe. The capacity
is normally allocated in portions, through
annual, monthly and daily auctions.
In implicit auctions, the capacity between
bidding areas is made available to the
spot price mechanism operated by the
power exchanges. If there is sufficient
capacity, bids in the high price market
can, in effect, be matched against offers
in the low price market. If there is
sufficient capacity the markets become
one; if not, prices converge but remain
different, and the gap represents the
cost of congestion.
According to EuroPEX (the Association
of European Power Exchanges), market
coupling can help to remove the
unnecessary risks of trading short-term
capacity and energy separately,
encourage liquid, robust spot markets
and allow all spot market participants to
benefit from cross-border access.
Introducing market coupling can help to
minimise price differences and achieve
market convergence if there is sufficient
capacity. It also means an efficient use of
interconnector capacity, a key concern of
the European Commission, which wants
to maximise efficiency of the existing
European electricity infrastructure, as well
as constructing new interconnectors.
Market coupling can involve explicit
capacity auctions or implicit capacity
auctions. An explicit auction is when the
transmission capacity on an interconnector
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is auctioned to the market separately and
independently from the marketplace
where electricity is auctioned. An explicit
auction is considered to be a simple
method of handling the capacity on
international interconnections in Europe.
The capacity is normally auctioned in
portions, through annual, monthly and
daily auctions.
An implicit auction is when the flow
on an interconnector is taken into account
based on market data from the
market-place in the connected markets.
In implicit auctions, the capacity between
bid areas is made available to the
spot price mechanism in addition to
bid/offers per area, thus the resulting
prices per area reflect both the cost of
energy in each internal bid area (price
area) and the cost of congestion.
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Market coupling is only slightly different
from market splitting, another form of
implicit auctions pioneered by Nord
Pool. Under market splitting one power
exchange operates across several price
zones, whereas market coupling links
together separate markets in a region.
The effect is, however, the same.
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Autumn 2007
A study by Frontier Economics,
Consentec and IAEW for the German
Federal Network Agency, published in
November 2006,1 showed that the explicit
auctions are an efficient mechanism the
further away one is from real time, for
example when considering transactions
for several months or a year ahead.
Conversely, the report concluded that
implicit auctions are more efficient for
short-term capacity rights, for example
day-ahead.
Netherlands and the newly created Belgian
Market coupling in practice
So far the Nordic, the TLC (France, Belgium
The trilateral coupling establishes a single
and the Netherlands) and Iberia, have
created regional implicit auctioning
only differs if there is insufficient capacity
arrangements.
Belgian-Dutch borders. Since the start
The Nordic market splitting was the first,
beginning in 1996 with the start-up of
the joint Norwegian-Swedish power
exchange, renamed Nord Pool. In 1998,
Finland joined, and trade with western
Denmark began in 1999. The Nordic
power market became fully integrated
spot market, Belpex, in a day-ahead
market coupling mechanism. This brings
together three major electricity markets
that account for 25% of the EU’s electricity
production. Other parties are the TSOs
TenneT, Elia and RTE. The aim is to
maximise electricity trade and drive up
the cross-border capacity utilization, and
many observers believe that there has
been substantial success in achieving both
these objectives.
price for power across the region, which
available on the Belgian-French or the
of market coupling operations last
November there has been a single market
price across the region 61% of the time,
and the incidence of large price
differences as reduced considerably. In
addition, the use of interconnectors has
become very much more efficient.
with the addition of eastern Denmark in
The new joint market also enabled the
October 2000. In 2005, Nord Pool Spot
opened a bidding area in Germany, linked
creation of a power exchange in Belgium,
via the Kontek cable.
liquidity and prices close to those of
More recently, the trilateral market
(1) Economic Assessment of Different
Congestion Management Methods (translated
from the German). Report for the Federal
Network Agency. November 2006.
This links France’s Powernext, APX of the
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coupling was launched in November 2006.
Belpex, which from its start has had good
APX Energy Viewpoints
Autumn 2007
France and the Netherlands. Members
between Norway and Netherlands. In the
of our expert panel believed that on the
short term, however, the cable will be
whole the project has been a success.
operated through explicit auctions, while
It has helped to boost liquidity on the
it is planned to introduce implicit auctions
exchanges and to increase market
as soon as possible.
convergence.
There are also plans for the British and
A plan to extend market coupling to
Dutch markets to be coupled by 2010,
Denmark and Germany by using implicit
auctions for the daily cross-border capacity
when the BritNed cable linking the two
countries should be completed. Access to
allocation for both interconnectors
the capacity will be through daily implicit
between the two countries was agreed
auctions facilitated by APX, together with
in 2006. Thise intention is to connect the
the option of explicit auctions
Nord Pool market, where implicit auctions
are already implemented, and the German
market. Originally, it was planned that the
link should be operative by the 4th quarter
of 2007, but now the project is planned for
launch on 3 June. Participants in the
project are Nord Pool Spot, EEX, E.ON
Netz and Vattenfall Europe Transmission.
In a further development, a Memorandum
of Understanding on market integration
and security in the Central West European
region was signed in June this year by
France, Germany, Belgium, the Netherlands
and Luxembourg – the widest agreement
on co-operation in electricity markets so far
in Europe. The coupling of these different
markets is targeted for January 2009
according to the MoU. The European
Norway and Netherlands. The licence for
Commission has hailed the agreement as
this project was given on condition that the
“the foundation stone for the EU’s largest
integrated regional energy market to date.”
capacity be allocated by market coupling
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Another market coupling project concerns
the NorNed cable, a 700MW link between
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Autumn 2007
The power sector is also calling for market
However, there was more disagreement
coupling to be extended to the Iberian
about whether market coupling could
market, and also to Eastern Europe. The
create capacity that is not there, and
Balkan states are in the early stages of
whether spot market coupling does or
planning a regional power network, and
does not allow market participants to
the Italian energy regulator is chairing
hedge transmission price cost.
a south European initiative to integrate
the region up to the Black Sea. Physical
links in the area are also improving, with
Greece hoping to be connected to
Turkey’s power market through a new
transmission line by the end of this year.
Most members of our panel agreed that
there would be more market coupling in
the future, although this could take some
time to achieve. Markets that are likely to
be coupled in the next few years include
France and Germany, France and Spain,
Next steps
The members of our expert panel were in
as well as the linking of west European
broad agreement on the subject of market
example Germany with Poland. However,
coupling. Contributors generally agreed
the time-scale for these initiatives is
that market coupling was one way, if not
difficult to predict and depends partly on
always necessarily the best way, to solve
congestion management, although
the success of the current initiatives.
Clearly, however, the momentum is currently
they also believed that some markets, for
working in favour of greater market
example the UK and France, are not
integration, and market coupling is seen as
currently amenable to coupling. There
an efficient way to achieve this objective. ■
markets with central European markets, for
was also a consensus that market coupling
works best when there is a day-ahead
power exchange, while market coupling
is not a substitute for more fundamental
reforms, for example ownership
unbundling of TSOs and cooperation
between regulators.
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MOFFATT ASSOCIATES
November 2007